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What is Market Manipulation in Cryptocurrency?

Important Information

  • Market manipulation is an attempt to artificially influence the price of an asset or the behavior of markets.

  • Although crypto exchanges have become more wary of market manipulators, it is important to identify common behaviors to detect malicious people.

  • Pursuing market manipulation is a deceptive game of catch. To protect your crypto assets, we have listed the most common manipulation strategies and how you can avoid them.

In this article, you will learn the basics of crypto market manipulation and how you can deal with the most common market manipulation strategies.

Market manipulation is an attempt to artificially influence the price of an asset or the behavior of the market. This typically involves a group or a single individual trying to create an illusion in the market and make a profit. For example, "pump and dump" might involve someone making a profit by raising the price of a cheap asset with fake news. You may remember this example from the movie Wolf of Wall Street, the true story of notorious stock market manipulator Jordan Belfort.

In 2018, the US Department of Justice (DOJ) launched an investigation to detect whether there was deceptive price manipulation on the Bitcoin network. The crypto market is still young and growing, meaning bad guys will continue to find ways to take advantage of the lack of regulation. Manipulation does not help the market and does more harm than good to its participants. Although illegal in many cases, manipulation isn't always an easy thing to detect for regulators and officials. In this article, you will learn the basics of crypto market manipulations and how you can deal with the most common market manipulation strategies.

Market Manipulation and Money Manipulation: What's the Difference?

Crypto market manipulation should not be confused with currency manipulation. Only authorities, such as governments and central banks, can manipulate money. Currency manipulation is perfectly legal, but other countries may challenge it. For example, governments may want to appear more competitive by reducing the value of their currency relative to another currency. This is commonly called a "devaluation."

Four common market manipulation strategies

1. Pump and Dump

The most common culprit in the crypto market is pump and dump, where a group of people cooperate to artificially raise the value of a coin. Pump and dump usually targets low market cap coins that are available on a limited number of exchanges. Members of the group buy a coin early and sell it when investors and users show enough interest in buying it. In recent years, pump and dump manipulation has become easier thanks to social media communities like Reddit, Telegram, and Discord. You may remember names like Moon Pumps. In these situations, typically, leaders profit while other participants lose.

2. Scam on the Whale Wall

This type of spoofing was a common tactic when Bitcoin first came out and still happens on less regulated exchanges. This strategy involves a whale entering large orders on the order book to create fake buy and sell walls. For example, if a whale wants to create negative market sentiment and lower the price of a coin, it will start placing large sell orders to prompt investors to panic sell. When investors start selling en masse, the whales will cancel their sell orders and start buying at a lower price.

3. Increased Volume of Fake Trades

Volume-boosting scams are similar to whale wall scams in that they both involve pumping misleading information into the market. This strategy involves an individual or group quickly buying and selling the same cryptocurrency, thereby artificially inflating the volume. The increased activity of the asset attracts the attention of investors and users and leads to a further deterioration in the price. Smaller, unregulated exchanges typically engage in bulking fraudulent transactions to increase trading volume, generate more commissions, and attract more users.

4. Stop Hunting

Stop hunting involves a whale pulling the price of a cryptocurrency to a point where market participants have placed stop-loss orders. Most people set their stop orders at similar technical levels. The whale will also place multiple sell orders to lower the price and trigger stops, creating high volatility and an opportunity to buy the asset at a lower price.

How Does Market Manipulation Affect the Crypto Market?

Market manipulation increases volatility in the crypto market and makes it seem chaotic and unsafe for new investors. If crypto market manipulation continues to have gray areas, regulators and governments will continue to scrutinize this new industry. It's easy to manipulate the low volume of certain coins, and after a big rise, hard drops are also quite common, especially on relatively small crypto exchanges. Sometimes whales don't even need to buy or sell an asset. Just by posting a mysterious tweet, they can cause an asset to skyrocket or, worse, sink to the bottom. If you want to protect your crypto assets from market manipulations, read on to learn about four different strategies you can add to your repertoire.

How Can I Deal With Market Manipulation?

Tracking market manipulation is a tricky game of hide and seek. Always remember to do your own research and due diligence before investing in any asset. We have listed four key strategies to protect your crypto assets from market manipulation.

1. Confirm from multiple sources.

Do not rely on a single source of information, such as an order book, to verify an asset's movements. Compare your asset's data from different sources like Coinecko and Coinmarketcap.

2. Pay attention to previous price trends.

From time to time, whales will increase volume by making volume-boosting fakes on different exchanges. For example, placing a large order on a popular exchange and vice versa on a small exchange. Users can avoid this whale tactic by basing their decisions on past price trends rather than recent movements.

3. Diversify your investment portfolio.

Your crypto portfolio should include a healthy variety of assets depending on how much risk you want to take. In other words, don't put all your eggs in one basket. If your portfolio is sufficiently diverse, market manipulation can only affect a small percentage of your holdings.

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